Questor share tip: Randgold falls create entry point

"Buy when you hear the gunfire" is a well-worn phrase among
contrarians. Investors with this outlook are likely to be piling in to
Randgold Resources after yesterday's 13pc plunge. But should you follow?

A contrarian investor is one who goes against the flow – buying when others are selling and selling when others are buying. The idea is that when everyone else is panicking, cool heads can set themselves up for spectacular gains.

Shares in the FTSE 100 gold miner slumped on news of a coup in Mali, the West African nation where its flagship Loulo mine is located, as well as its Gounkoto operations and its joint venture Morila. Randgold gets about two-thirds of its gold production from this country.

Mali is actually a bright spot in the often murky world of African politics, being a functioning democratic nation. However, the constitution has now been suspended and institutions "dissolved" in a dispute with Tuareg separatists in the north. The military said it "does not in any way aim to confiscate power, and we solemnly swear to return power to a democratically elected president as soon as national unity and territorial integrity are established".

Mark Bristow, Randgold's chief executive, is currently at Loulo, which is 220 miles from Bamako, the country's capital. "Malians respect laws and I don't believe this will come with a high-handed change in political direction. We don't expect any subsequent governments to disregard proper and due process," Mr Bristow said. All operations in the country are currently running normally.

In 2011, Randgold's pre-tax profits soared by an eye watering 234pc, as higher production at its mines in Ivory Coast and Mali fed through to the bottom line. This resulted in the company doubling its dividend. However, with a prospective yield of just 0.7pc, there is scope for further increases.

The company's expansion plans should also lead to a rise in profits this year. Gold production in 2011 rose 58pc to 696,023 ounces and the company has guided to 2012 production of between 825,000 and 865,000.

The shares are trading on an earnings multiple of 13.6 in the current year, falling to 12.8 in 2013.

Questor is, at heart, a contrarian. The falls appear to have presented a buying opportunity. Of course, there is a possibility that, as in all these cases, the situation could spiral out of control. However, investors should consider the share a new speculative buy.